Design of an Operational Risk Management System Project Example

Description

Great Lakes Finance Company (GLF), a small Michigan-based retail and commercial lender, experienced several severe operational risk losses. These events, combined with recent actions by the U.S. Federal Reserve (“Fed”) to define criteria and requirements for measuring and managing operational
risk, highlighted the need for GLF to overhaul its current risk
management system.

The motivation for improvement was clear: Lower risk results in better lending rates, which leads to higher margins or greater
market share. The Six Sigma team tackling this problem redesigned GLF’s operational risk measurement system and integrated the methods into GLF’s existing Enterprise Risk Management (ERM) system.

As a result of this Design for Six Sigma (DMADV) project, no major loss events occurred in the five months following the project. Annual savings from reduction of all loss events were estimated to be $6.4 million. Because most of this benefit results from elimination of losses that were never budgeted, the benefits will not be readily reflected in financial performance variances to plan or forecast. Still, because the losses could be expected to
continue had no action been taken, the ERM team agreed to classify these benefits as hard savings.